Inter Link's rollercoaster ride

22 June, 2007
Anne Bruce charts the up-and-down fortunes of troubled cakes supplier Inter Link and finds that the news is not completely bleak
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A timeline on supplier Inter Link's website charts its phenomenal growth since it was founded in 1994. It has not been updated since 2005.
That year, Inter Link became the UK's number two cake supplier, with the £12.25m purchase of the Yorkshire Cottage Bakeries Group. The deal was its ninth and largest acquisition and gave it annualised turnover of £125m, putting it ahead of Northern Foods' annual £110m cake turnover, but still behind RHM on £300m cakes turnover.Inter Link was then one of the brightest stars of the Alternative Investment Market with shares trading at 770p. In the 18 months since, its fortunes have turned, hitting rock bottom last week as it suspended trading of shares (then at 106p), an admission that they could be worthless. Inter Link's market capitalisation was £88.6m in early 2006, now it has only debts of £63m. What happened? And where does this rollercoaster go next?Impending troubleAnalysts agree that five major issues plunged the company into chaos, but that there was a whiff of impending trouble around it all along. Inter Link had over-expan-ded and did not consolidate fast enough. It had high debts, market dynamics changed and then its senior managers left en masse.In something of an understatement, Shore Capital analyst Andy Blain suggests that Inter Link has been "the victim of an unfortunate series of events". He says: "We were concerned two years' ago about Inter Link and its debt levels and performance in the underlying business. Management was starting to run out of room to manoeuvre."Another analyst echoes these views: "It was growing rapidly through acquisition and should have put the investment in place to pull the business together. Customers did not want 12 lorries from different Inter Link bakeries turning up at their back doors, so Inter Link came under pressure to centralise distribution. Supermarkets are more tolerant of smaller sup- pliers, but once it was on the radar, it needed to reach higher standards. So the emphasis changed from acquisition to consolidation and organic growth."Inter Link began to pull the company together. It spent £1m on a central IT system. And in early 2006, it announced plans for a 189,000sq ft central distribution depot in Warrington, Cheshire, run by logistics company Christian Salvesen. Commissioning that site took longer than expected and there were major issues in integrating Inter Link's systems. All that lead to major cost duplications and exceptional costs of £1.3m in the six months to November 2006. Service levels for its customers also became simply "unacceptable", it has since admitted.At the same time the company closed its smaller Newton House Bakery, in Herne Bay, its Crossfield site in Blackburn and Hoppers in Kent, centralising production.And it announced two new 30,000sq ft production sites in Trafford Park, alongside the existing Soreen plant. The first, which doubled its capacity for Soreen branded products, opened in August 2006. The second, the company's first pudding site, is just opening now.Meanwhile, it was working towards ambitions to expand in Eastern Europe, starting by doubling production capacity at its new Polish factory to 150,000sq ft.This frenetic schedule overstretched management. Inter Link has since admitted it failed to bring in proper outside expertise.Market dynamics were also changing. Following its flotation on the stock exchange in 2005, RHM, which owned Manor Bakeries and branded cakes businesses including Mr Kipling, decided to focus on an aggressive fight-back with a promotional campaign for its Mr Kipling brand. One analyst suggests: "The supermarkets like to encourage smaller suppliers to grow. RHM was dominant, but when Inter Link became a large supplier itself things were different."Another issue was management churn. Late last year, Inter Link, then valued at £59.6m, was approached by a private equity house. The talks led to nothing, but prompted chief executive Paul Griffiths to review his priorities. He left to restore a monastery in Manchester, a project he had been pursuing part-time.Finance director Chris Thomson was promoted to CEO, leaving the finance position unfilled. Chairman and founder Alwin Thompson was forced to resign due to ill health in February. Former chairman Jeremy Hamer, who had scaled back his role to non-executive director, took over. Inter Link has still not recruited a new finance director.Inter Link had always had always run a volume business on unforgiving margins. It could not absorb unexpected costs on all sides. Its efficient low-cost volume production model did not work without the 'efficient' bit.The company now has £63m debt with the banks, led by Barclays. They are looking for a sensible offer from a buyer, perhaps as low as £30m to £40m, according to analysts' estimates.Potential buyers circling are tipped to include Vision Capital to run alongside its Park Cakes business, Premier Foods, Finsbury Food Group and Greencore. Irish company McCambridge, which this month withdrew a bid when banks would not agree to write off any debt to seal the deal, is expected to re-enter the fray.Inter Link is unlikely to attract much interest from venture capitalists though, an analyst sugges-ted. With its need for restructuring it is not what they would look for.The irony is that despite its troubles, Inter Link is back on the up. The firm still has sales of £120m a year and service levels have stabilised, according to latest trading updates. With new IT systems in place, better-quality management information is available.Jeremy Hamer is impressively calm and effective in keeping the business going in this crisis, and the new MD, Ian Croxford, has a strong operations background, useful in a disparate business which needs welding together.And any buyer can be sure there is still plenty of retailer support for the company, which is fortunate for the 1,800 staff it employs. Analyst Andy Blain puts it in simple terms: "When you think how many mince pies it makes - 100 million plus a year - if it went under we would have no mince pies at Christmas." n



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